The government has increased the tax but to what end? Now the banks have raised their interest and the economy is not stable on the news.
You should understand that the government and the Fed are working to boost the condition of the economy yearly.
When the economy hits a rough patch, the government typically responds with stimulus for actions meant to jumpstart economic activity.
There are two ways the government does this.
You’re likely familiar with these two concepts or at least heard of them which are monetary policy and fiscal policy.
Both policies are used to stimulate the economy so what is the gap? Monetary policy seems not to be vague but it is kind of controversial and it’s less contentious than fiscal policy.
Insight on Monetary Policy and Fiscal Policy
Fed powers Monetary policy
Coming to an understanding between monetary and fiscal policy and their purposes will narrow its ambiguity, especially regarding the economy and investments.
So first, monetary policy is essentially the way the government regulates the amount of money that goes around in the nation’s economy. The Federal Reserve set this up to control the money supply.
The Fed is responsible for pursuing price stability, maximum employment, and stable economic growth. To do this, the Fed has a few tools to adjust the money supply, and the total amount of money available at any given time.
Congress powers Fiscal policy
Fiscal policy refers to the government’s recommended policies to raise taxes and spend the money it raises.
Statistics have shown that American politics, as you know, has been adamant about raising taxes and somewhat reluctant to have the government spend money in the past 20 or 30 years.
Whereby there is more money spent and less tax-raising, it will be that the tax policy has turned inadequate in the economy.
Fiscal policy is controlled by the executive and legislative branches. So in this case, you know, the legislative branch can recommend policies and those types of things. We have a kind of checks and balances system so no one can do it without the other.
So fiscal policy is going to take two forms. One, it is going to take the form of government spending and two, it will take the form of taxation.
So the government, of course, is responsible for two things. One, the money that it spends on the government has a huge budget, and then it will, in turn, use that budget to support certain areas of the economy that it thinks needs to be supported.
Taxation, of course, means what we earn from salaries or wages as consumers will pay our taxes. Both the Fed and the government can be seen as consumers who also use credit as a way of giving to the citizens.
This is a primary remuneration for the government aside from the other sources. Property from sales or transfer of property of the deceased, incomes and deals are sources of the revenue. So we will of course spend it.
Government spending is the key tool during economic hardship, recession and high rates of unemployment. It increased a little bit after the great recession and the people on the other hand, are trying to kind of improve their balance sheets, but it usually hovers around that percentage.
This cuts across every sector of the economy. Things such as national defence, entitlement agendas (such as Social Security and Medicare especially for the aged), earnings on the national debt and optional spending that ranges from the least to funding scientific research to building infrastructure and subsidising farms are what the government brings about budgets.
One interesting thing that didn’t make the distinction is under the fiscal policy or merely talking about a redistribution of existing monies. The government can create money.
Let’s say you have earned $150 and you probably save $10 while the rest goes to spend. This is good but if the government comes in to do the spending then it will be of no good. The probability of saving will depreciate.
The US has a very terrible savings rate. I believe it fluctuates, but it can range anywhere from one to maybe 2%.
Forms of Government spending
The government can equalise the surplus and shortage of investment spending and private sector consumption for a stabilized economy. They also check the gross domestic product of the country.
The emotions of the people like fear, uncertainty, risk-bearing, depression and more can influence the economy. The government uses two forms of fiscal policy to counteract it.
The first is expansionary policy, where people pay lower taxes giving more room to spend. It is a virtuous revolution during the time of recession in the economy. in turn, boosts wages and incomes for consumers to spend and Invest.
While the other form, contractionary fiscal policy serves as a tool for reining in unusual growth. It involves raising interest rates and restraining the supply of money and credit in order to constrain inflation.
Meanwhile, fiscal policies such as subsidising wages are now being used to tackle the effects of pandemic lock downs. This is likely to last long beyond COVID and has some serious implications for investors.
Conclusively, monetary and fiscal policy are different things with a similar goal.